Transcript: Nightly Business Report – May 3, 2017

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Driving ahead. Automotive newcomer Tesla sees its revenue double, and deliveries hit a record, just as sales slow industry-wide.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Status update. Facebook’s profits surge, fueled by growth in mobile ads. But investors don’t appear to like the result.

MATHISEN: And all real estate is local. While some housing markets are red hot, others are nowhere close.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, May 3rd.

HERERA: Good evening, everybody, and welcome.

It’s the newest automaker on the car scene. And at times, it’s the most valuable. Tonight, Tesla said its quarterly revenue more than doubled. And it shipped a record number of cars in the first three months of the year.

But it’s not your typical car company. Founder and billionaire Elon Musk described his vehicles as a sophisticated computer on wheels.

The electric carmaker also burned through a lot of cash in the quarter and it’s not profitable. Tesla’s loss of $1.33 a share was wider than expected. Revenue for the quarter, though, topped $2.7 billion. The stock, as you might expect, was volatile in after-hours trading.

Phil LeBeau has more on Tesla’s quarter.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: In reporting its first quarter results, Tesla gave some insight into two important issues that Wall Street will be focusing on in the days to come.

First of all, with regard to the Model 3, that’s the mass market electric vehicle set to go on sale later this year, Tesla says production is scheduled to begin in July of this year. That’s the vehicle that they expect to sell for about $35,000 or $40,000 when it goes on sale.

The second point is, Tesla says it expects to have vehicle production at a rate of 10,000 vehicles per week at some point in 2018. And if that happens, Tesla will meet the goal that it set some time ago to produce vehicles at a rate of a half million per year by 2018.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: Facebook, the last of the top five U.S. tech companies to report, and it may have been worth the wait. The company saw profits soar more than 75 percent from a year ago. Its lucrative mobile ad business continues to grow, and nearly 2 billion people were using the social media service every month.

But in after-hours trading, investors weren’t so impressed, sending shares initially lower.

Julia Boorstin has the one key takeaway from Facebook’s numbers.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Facebook outperformed expectations as it continues to grow its user base and brands look to reach Facebook’s 9.4 billion users.

Here’s what COO Sheryl Sandberg told me is driving the company’s results.

SHERYL SANDBERG, FACEBOOK COO: Businesses making the shift to mobile. Businesses know that they need to reach their current and future customers where customers are, and that’s on mobile. Facebook and Instagram are the two largest mobile advertising platforms that there are. We’re experiencing strong growth in users and we’re experiencing strong growth in advertising. I think those two things go together.

BOORSTIN: Sandberg also said while Instagram is now a driver of the company’s revenue growth, they see potential to generate revenue from their messenger app down the line.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Beverly Hills.

(END VIDEOTAPE)

MATHISEN: Facebook will hire 3,000 workers to monitor content. This is part of the company’s effort to remove questionable material following high profile incidents of people sharing videos of suicide and murder. The new employees will review millions of reports Facebook gets each week about posts that may violate its terms of service. Facebook already has 4,500 workers who review posts.

HERERA: Federal Reserve policymakers acknowledge some of the weakness in the economy and decided now is not the time to make a move on interest rates. But the Central Bank did signal it is still moving ahead with policy tightening.

Steve Liesman reports tonight from Washington.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Federal Reserve looked through economic weakness and signaled to markets that a June rate hike remains on track. While it said growth is slow, the consumer spending grew only modestly, it went on to say, quote, “Fundamentals underpinning continued growth of consumption remain solid” and that “The committee views the slowing in growth during the first quarter as likely to be transitory.”

The Fed repeated the line from March where it said specifically that economic conditions were likely to warrant gradual hikes in the future, leading many on Wall Street to think the June rate hike is more in play now.

SCOTT MINERD, GUGGENHEIM PARTNERS: It’s basically what we should have expected, you know, that the economic weakness is probably transitory. They want to stay on a path to increase rates.

LIESMAN: Fed funds futures showed a fairly sizable chance for a rate hike coming this June.

The Fed didn’t change its balance sheet language, saying it would continue to reinvest principal. Most observers think a plan to reduce its holdings will come later this year.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman in Washington.

(END VIDEOTAPE)

HERERA: And bank stocks rose in trading on those expectations for June interest rate hike. The bank ETF outperformed the broader market today.

MATHISEN: Private sector job creation cooled in April but was still in line with what economists had expected. Private payroll processor ADP said companies created 177,000 new positions, a steady pace, but a sharp deceleration from the prior month. It was also the smallest increase since October.

Some of the highlights included increase of 11,000 in manufacturing jobs. Business services added 72,000, the most in three years. Small and medium-sized firms increased hiring while construction employment fell.

HERERA: And growth in the services sector accelerated in April, thanks to an increase in production and new orders. That’s good news for the overall economy, since the services sector accounts for about 80 percent of the economy. According to the Institute for Supply Management, this is the 88th straight month of growth.

MATHISEN: That economic data and the Fed standing pat were barely able to move the needle on stocks today. The Dow rose 8 points to 20,957. NASDAQ inched back from record territory, giving up 22. And the S&P 500 was off 3.

HERERA: Well, despite not moving all that much today, the stock market is holding at all-time highs. But volatility is low. So, does this calmness on Wall Street pose a danger to investors?

Doug Butler, portfolio manager at Rockland Trust, joins us now to talk about that.

Welcome, Doug. Nice to have you here.

DOUG BUTLER, ROCKLAND TRUST PORTFOLIO MANAGER: Nice being on.

HERERA: You say that there’s more uncertainty in the market, you think, than is currently indicated by the volatility index, commonly known as the VIX.

BUTLER: Yes. The VIX is indicating low volatility in the market but, really, that doesn’t mean there’s low uncertainty. I think the markets have gotten a touch complacent and there’s enough events out there that could cause problems down the road. But to be fair, it’s been pretty smooth-sailing thus far this year.

MATHISEN: Is complacent another way of saying that the market is anticipating that everything is going to go pretty much as planned, and is discounting or dismissing the possibility that things could go wrong?

BUTLER: I think you saw it today with Facebook, for example. They had a monstrous number and delivered great results, but they weren’t good enough results to really move the meter for that stock. And it came back a bit. I think really the markets are pricing in corporate profits continuing to grow at a very fast pace. I think it’s 13 or 14 percent for this past quarter.

And again, if we continue to see corporate profit growth of this level, low unemployment, low inflation, relatively, you know — wage inflation not really going anywhere, we’ll continue to see the stock market move up. But that’s a lot of ifs.

HERERA: What about the geopolitical risk out there. North Korea certainly comes to mind, but also, you know, the upcoming French election, the Brexit negotiations. There are a number of big headline risk stories that are out there.

BUTLER: Yes, I mean, I think we learned six or seven months ago that somebody who has a 15 percent chance of winning can actually win, and that in the French election, if Marine Le Pen wins, that’s going to be a shock to the system. If North Korea gets any more volatile than it currently is, granted there’s always saber-rattling there, but if they get — if the Trump administration and China end up at a standoff regarding North Korea, it could be very problematic.

MATHISEN: So, let’s round third and bring it home for the investor who is watching tonight. If I buy your argument, what should I do?

BUTLER: Well, one of the things we recommend at Rockland Trust is really making sure you look at what your objectives are. Again, if you’re a millennial, you’ve got plenty of time to worry about the stock market and stay fully invested. If you’re a retiree, you really should be looking at your overall allocation and make sure it’s in line with what risks you can take.

The other thing is, you know, again, people have had a really good run in the stock market for the last year, and frankly for the last seven years. If you haven’t rebalanced your portfolio and taken some of your winnings off the table, now might be a good time.

HERERA: Doug, we’ll leave it there. Thank you so much for joining us. Doug Butler with Rockland Trust.

BUTLER: Thank you.

MATHISEN: The health insurer Aetna will exit the Virginia Obamacare market next year. The company’s decision was based on growing uncertainty in the marketplace and $200 million in expected losses nationwide from the business this year. Aetna has already sharply curtailed its participation in the marketplace and has not yet announced its plans for Nebraska and Delaware.

HERERA: Aetna’s decision comes as Republicans in the House work to bring new health care legislation to a vote. The House majority leader today said significant progress has been made on an Obamacare repeal bill. This after Congressman Fred Upton said that he would back the measure if it includes his proposed amendment that increases protections for people with preexisting medical conditions.

(BEGIN VIDEO CLIP)

REP. FRED UPTON (R), MICHIGAN: I think it is likely now to pass in the House. We’ll see what happens. I’m not on the whip team. But then it goes to the Senate and there will be a conference. This bill will change from where it is today, and likely from my perspective and others, probably change for the better.

(END VIDEO CLIP)

HERERA: Congressman Upton’s amendment would add $8 billion over five years to high risk pools to help offset costs for people with those preexisting conditions.

And separately, the House today passed the trillion-dollar spending bill to fund the government through the end of September. The Senate is expected to vote on the measure later this week.

MATHISEN: Secretary of State Rex Tillerson today said the U.S. is considering imposing new sanctions on North Korea if necessary.

(BEGIN VIDEO CLIP)

REX TILLERSON, SECRETARY OF STATE: We are preparing additional sanctions, if it turns out North Korea’s actions warrant additional sanctions. We’re hopeful that the regime in North Korea will think about this and come to a conclusion that there’s another way to the future.

(END VIDEO CLIP)

MATHISEN: Investors, of course, have been watching the tensions between the two countries rise in recent weeks. The Trump administration has asked China, North Korea’s biggest trading partner, to help turn Pyongyang away from its development of nuclear weapons. Secretary Tillerson called on countries all over the world to implement existing U.N. sanctions on North Korea.

HERERA: Still ahead, the uneven recovery. Headlines say home prices are at new peaks and rising. But that’s not true everywhere.

(MUSIC)

HERERA: To the housing market, where this spring’s market is marked by much higher prices. But that doesn’t mean housing has fully recovered. Not even close.

Diana Olick explains.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Don’t be fooled by big national numbers. Yes, when you look at indexes of major metropolitan housing markets, they show big price gains. But the fact is, barely one-third of the homes in this nation have recovered to their prerecession price levels, that according to a new report from Trulia.

In markets like Denver, Seattle, San Francisco, Dallas, even Oklahoma and Nashville, nearly all the homes have recovered to their precession peaks, and most have surpassed that. on the flip side, Vegas, Tucson, Ft. Lauderdale, New Haven, Connecticut, Camden, New Jersey, and Riverside, California, among others, are not even close. In the markets that have seen the greatest recovery, it’s largely due to income growth.

We talk a lot about supply and demand. But Trulia looked at four factors: employment, income, population, and vacancy rates. And researchers there found that income growth correlated most to home price cost. It’s pretty simple, when incomes rise, households tend to spend more on housing, which pushes prices up.

Supply and demand are a factor, but the very tight supply of listings is most prominent in markets that are seeing that big income growth. That’s where more people want to buy, especially younger buyers who are currently renting — the supply issue is worse at the entry level, and that’s where price jumps are the biggest.

For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.

(END VIDEOTAPE)

MATHISEN: Aaron Terrazas joins us now to talk more about the housing market recovery and his outlook for home prices. He is senior economist at Zillow.

Aaron, obviously, the numbers in that report came from one of your competitors. But I want to ask you whether you see the same thing that Diana cited there. Is only a third of the market — are only a third of the markets back to their precession levels?

AARON TERRAZAS, ZILLOW SR. ECONOMIST: That’s very true. The recovery in the housing market has really kind of been a story of two different countries, kind of strong, booming job market, seeing strong home value growth and housing market velocity. And another part of the country that’s seen a relatively weak recovery after a very sharp drop during the recession.

HERERA: Are we seeing any movement in the ability for people to move up, or the entry level home for many people, those have kind of the two sticking points in housing.

TERRAZAS: Particularly in those fast moving, high growth markets, there’s very few entry level homes on the market. What we’re seeing actually is that even mid-level buyers who a decade ago or two decades ago would have upgraded, you know, purchased a bigger home, they’re deciding suddenly to renovate, add an extra bedroom, add an extra bathroom, instead of move out of their home that they’ve outgrown.

MATHISEN: You know, Aaron, in response to Diana’s report earlier today, I Zillow’d, Zillow’d I tell you, my parents’ house just across the river in Arlington which I sold after they passed away in 1999. It has more than tripled in value because the Washington market is so hot. There’s income growth, there’s job growth.

Look at another place in northeastern Pennsylvania where there’s no job growth, house prices have gone down in that period of time.

TERRAZAS: That’s correct. The D.C. Metro has been one of the booming markets over the past decade, particularly in that inner ring close to the city. And you do see it in a number of places, closer to job centers are going to see stronger home value growth.

Now, Pennsylvania obviously is a different case. There are certainly pockets of strength, particularly in the Pittsburgh area. But a lot of the state has not seen the high income white color professional job growth that the D.C. area has seen.

HERERA: In those booming markets, Aaron, do you — if the Fed does move on interest rates, will that cool the market off? Or are those interest rates, those mortgage rates, still at such historically low levels that it won’t have an impact on the overheated markets?

TERRAZAS: Mortgage rates have been a bit of a conundrum. We’ve seen the Fed hike interest rates twice now over the past couple of months. Mortgage rates, long term lending rates have been flat. Mortgage rates are essentially where they were back in November. So, we haven’t seen that responsiveness in mortgage rates to the Fed’s actions.

Now, we do think that mortgage rates will rise in a couple of months, particularly in pricing markets. You think of San Francisco, San Jose, Los Angeles, that’s going to pinch buyers.

MATHISEN: You’re excused if you can’t answer this, but we know about Seattle, we know about Silicon Valley, we know about L.A., New York, Washington, D.C. Tell me about a sleeper market where the prices are going up where I might not expect them to.

TERRAZAS: I think some of the kind of strongest markets that are not frequently talked about are places in the Southeast, places like Dallas, Nashville, Tampa. They’ve seen really strong home value growth over the past six months to a year. And still remain relatively affordable.

Dallas in particular, you know, is really a booming place where they’ve been able to contain affordability despite strong home value growth.

MATHISEN: I like tampa, they’ve got water there.

TERRAZAS: Great for retirees.

MATHISEN: I’m not — you’ve put it in my head. Aaron Terrazas with Zillow, we appreciate it.

TERRAZAS: Thank you.

HERERA: A surge — you’re not retiring or anything.

MATHISEN: I hope not.

HERERA: A surge in subscriptions lifts results at “The New York Times.” And that’s where we begin tonight’s “Market Focus”.

The newspaper publisher topped profit and revenue expectations, saying much of the quarter strength came from a rise in digital subscriptions. The company said weakness in the print side of the business hurt overall ad revenue, but the CEO Mark Thompson said he’s not worried about print affecting future results.

(BEGIN VIDEO CLIP)

MARK THOMPSON, THE NEW YORK TIMES CEO: In Q1, we grew our revenues 5 percent year over year. I’m very committed to getting into the habit, quarter by quarter, of growing total revenue, by growing total digital revenue quicker than print revenues declining.

(END VIDEO CLIP)

HERERA: Shares took off, rising 12 percent to $16.10.

Delphi Automotive said higher sales across all its markets helped overall revenue top expectations. Earnings were also ahead of estimates. The car parts maker also said it will spin off its power train business, which makes engine parts, into a publicly traded company, so it can focus on creating technology for autonomous driving. Delphi’s shares rose nearly 11 percent to $87.01.

Cost cuts and an increase in postpaid subscribers helped Sprint narrow its loss but it was more than Wall Street was expecting. Revenue at the mobile carrier did beat expectations and the company’s CEO said he thinks this quarter is one for the record books.

(BEGIN VIDEO CLIP)

MARCELO CLAURE, SPRINT CEO: I think the results speak for themselves. When you look at the subscriber of what we just announced this year, we beat AT&T by 2 million subscribers, and Verizon by 1 million subscribers. So, I think we’re doing a good job. And we’ve delivered the best financial performance of Sprint of the last ten years. Our operating income was the highest in ten years.

(END VIDEO CLIP)

HERERA: However, investors sprinted for the exits. And shares fell more than 14 percent to $7.77.

MATHISEN: The gas and electric provider Southern Company said it strengthened its whole division and a recent acquisition helped revenue rise and top estimates. The company also posted earnings that beat expectations. Shares still fell a fraction to $49.47.

Kraft Heinz saw revenue fall as the maker of Philadelphia cream cheese and Jell-O, don’t mix the two, suffered weak sales in the U.S. and Canada. The soft revenue number wasn’t good enough for analysts. The company also reported disappointing profit. Shares initially fell after the bell trading, erasing earlier gains when the stock rose slightly to $89.14.

And the insurance giant AIG turned a profit in the latest quarter, as stronger operating results in the company’s commercial and consumer businesses helped earnings. AIG also launched a $2.5 billion share buyback and declared a quarterly dividend of 32 cents a share. Shares initially rose in afterhours trading. They also ended the regular session up a little — that’s a penny, folks — at $61.54.

HERERA: Uber is in court. And of all its recent controversies and challenges, some say this could be its biggest. The ride-hailing company went before a judge today to fight for the right to continue working on its autonomous car program. Uber is being sued by Alphabet’s self-driving car unit, Waymo. Waymo has accused a former engineer and current Uber executive of stealing trade secrets.

If the allegations are proven, legal experts say Uber could get hurt. Its $68 billion valuation has been propped up in part because of its potential to be a dominant player in that industry.

MATHISEN: Coming up, why immigrant entrepreneurs are finding success in the Windy City.

(MUSIC)

HERERA: Nearly $7 billion has been pulled out of a hedge fund Och-Ziff in the first four months of the year. Overall, assets under management at that firm are down almost 25 percent from a year earlier. Last year, the hedge fund settled a bribery probe that saw the firm’s founder singled out by regulators.

MATHISEN: Puerto Rico’s financial problems have worsened. The island has been placed under bankruptcy protection, making it the largest government in U.S. history to seek refuge from its creditors. It’s a historic restructuring of debt that includes more than $70 billion of bond debt and about $50 billion of unfunded pension obligations. The move likely sets up a showdown with Wall Street firms, which are owed billions of dollars.

HERERA: If you think sitting in economy class on a plane is tight now, well, it’s about to get even tighter if you fly American. The airline is planning to decrease the front to back space between some of its rows by as much as two inches. American says it plans to add more seats on its Boeing 737 MAX planes. United Airlines is reportedly considering a similar move.

LEBEAU: Well, it is Small Business Week. And there is a new wave of entrepreneurs — immigrants. In fact, they launched nearly a third of all new businesses in the U.S. last year.

And as Kate Rogers reports, that trend is playing out big time in the big city of Chicago.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: In Little Village, Chicago, Eduardo Rodriguez is offering the community a taste of his home.

EDUARDO RODRIGUEZ, DULCELANDIA CANDY STORES OWNER: Ninety percent of things that we are selling in our stores are imported from Mexico.

ROGERS: The Mexican immigrant launched his business Dulcelandia in 1995, selling Mexican imported candies like CarlosV and Pulparindo. In the past two decades, he’s built a mini empire with four locations.

RODRIGUEZ: I am grateful that I had this opportunity to do this in the United States. It takes a lot of work and a lot of sacrifice. But after all, when you go to the final analysis, the reason you came from where you came from.

ROGERS: As the debate over immigration policy continues on nationwide, immigrants like Rodriguez are having a major impact on entrepreneurship. Data from the Kauffman show immigrants launched nearly one-third of all new businesses in 2016 and were nearly twice as likely to start a business than native-born Americans.

Illinois’s immigrant population mirrors that trend, making up about a quarter of the state’s overall entrepreneurs, according to separate data from the New American Economy. And what’s more, there are about 110,000 immigrant-owned businesses right here in the Chicago metro.

RAHM EMANUEL, CHICAGO MAYOR: Immigrants have that unique work ethics, they know America is special, they know what they left behind. This is a unique country, a unique city, and it gives them a chance of opportunity.

ROGERS: Ayenew Biru has capitalized on that opportunity since fleeing his native Ethiopia with his mother and brothers in 1986. Now a U.S. citizen, he recently launched his second business, Tastes of Teff, which sells products made with the gluten-free grain.

AYENEW BIRU, TASTES OF TEFF FOUNDER: It’s very rare that you’re able to kind of go to a new place and people kind of accept you, and are willing to support you.

ROGERS: Biru’s message for immigrants entrepreneurs: don’t focus on things you can’t control.

BIRU: Don’t necessarily think about it in terms of, you know, how things may be different because you’re an immigrant. At the end of the day, you know, we’re talking about business. And, you know, business is all about making sure that you have a product or service that people actually want.

ROGERS: For NIGHTLY BUSINESS REPORT, Kate Rogers, Chicago.

(END VIDEOTAPE)

MATHISEN: To read more about immigrant entrepreneurs in the Chicago area, head to our website, NBR.com.

HERERA: And that will do it for us on NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera, thanks for joining us.

MATHISEN: I’m Tyler Mathisen. Have a great evening, everybody. And we’ll hope to see you right back here tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by ASC Services II Media, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2017 CNBC, Inc.

 

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